Brexit Could Be Good Or Bad News For Jaguar Land Rover

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The impending exit of Britain from the European Union could have dire effects on Tata Motors‘ (NYSE:TTM) British marquee brand Jaguar Land Rover, which forms more than 90% of the group’s valuation, as per our estimates. JLR is back in full swing in 2016, posting record-breaking half-year sales results, selling 291,556 vehicles between January and June, up 22% year-over-year. The primary growth driver was the 64% increase in Jaguar sales through the first half of the year. High demand for compact luxury vehicles has been the main reason for Jaguar’s rapid sales rise in the last year or so. JLR has also posted a solid 21% year-over-year growth in the U.K. so far this year, beating the growth seen by any of the German trio of Mercedes-Benz, Audi, and BMW in the region.

Tata Motors Q&A 14-1

The U.K. once again became JLR’s single largest market, overtaking China last year, due to the combined impact of strong vehicle sales in the U.K. and lower sales in China. The U.K. represented 21.4% of Jaguar Land Rover’s net vehicle sales in the first half of the year. JLR, headquartered in the UK itself, has 25,000 of its 26,000-plus employees working there. Growing uncertainty after the U.K. voted to exit the European Union weighed on the consumer and business confidence in June, negatively impacting vehicle sales in the month.

It might be too early to relate the fall in vehicle sales in the U.K. to the June 23 vote, as car deliveries typically occur several weeks after purchase decisions, and most of the month’s sales happened prior to the vote. However, manufacturers push to boost figures as much as possible at the end of the month, meaning the June 23 vote could have had an impact on the June results. Considering that the U.K. is JLR’s largest market, a possible slowdown in demand in the region will impact JLR’s revenue as well.

In addition, tariff barriers imposed following Britain’s exit from the European Union will effect JLR’s operations in terms of sourcing of components and movement of workforce in the region. Europe (excluding the U.K.) formed over 18% of JLR’s vehicle deliveries through the first half of the year. More than 80% of the vehicles produced in the U.K. are sold abroad. A massive 94% of the ~£11 billion imported automotive parts came from the European Union last year, with 27% from high-tech suppliers in Germany, according to Roland Berger. [1] The added costs might prompt increases in model prices, which could make JLR less competitive in the European markets, as compared to its chief competitors such as BMW, Audi, and Mercedes-Benz.

On the other hand, the fluctuations in the pound sterling against the euro and the U.S. dollar could play out in JLR’s favor. The automaker manufactures its vehicles primarily in the U.K., with three vehicle manufacturing plants– two in the West Midlands at Castle Bromwich and Solihull, and one near Liverpool in Halewood. In addition, JLR has a manufacturing plant in China, in partnership with Chery Automobile, and has recently opened its first wholly-owned manufacturing plant outside the U.K. in recession-struck Brazil. Considering that JLR exports most of the vehicles produced in the U.K., depreciation of the pound against the euro and the dollar could be favorable for the automaker.

The pound sterling is down ~10% against the euro and ~12% against the dollar since right before the announcement of the Brexit vote on June 23. Concerns over the U.K.’s current account, interest rate cuts by the Bank of England, and the U.S.’s prospective monetary tightening could lead to a further depreciation of the pound. The German carmakers (including non-premium brands such as Volkswagen) exported more than one million cars to the U.K. last year, and the declining pound is expected to dent earnings from the country, when converted back to the euro. This, however, could benefit JLR in the region. The automaker might be able to nab market share from its competitors by improving its price competitiveness within the U.K. and the rest of Europe.

Tata Motors Q&A 14-2

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Tata Motors
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Notes:
  1. Brexit may have adverse impact on Jaguar Land Rover’s operations, economictimes.com []